Generally, a consumer has three business days after consummation to rescind a transaction, but if the creditor fails to provide a proper notice of the right to cancel or proper material disclosures, the period is extended to three years. Recent decisions issued by the Fourth and Tenth Circuits reached different conclusions on whether a lawsuit is necessary to the timely exercise of the right of rescission.
Gilbert v. Residential Funding LLC, 678 F.3d 271 (4th Cir. 2012) – In Gilbert, the borrowers notified the lender within three years of consummation that they were exercising the right of rescission, but the lender rejected the request. The borrowers then filed a lawsuit, but it was more than three years after consummation.
The Fourth Circuit held that the lawsuit was timely because the borrower had previously sent a written rescission notice to the creditor within three years of consummation. The court noted that the rescission provisions of TILA and Regulation Z do not require the filing of a lawsuit to exercise the right to rescind. Instead, Regulation Z states: “To exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram or other means of written communication.”
The court was careful to note, however, that it was not stating that a timely notice automatically rescinds a loan. For example, a borrower may be mistaken in his belief that he is entitled to rescind. If a creditor rejects a written request to rescind, a borrower would have to file a lawsuit to obtain a judicial determination, but the lawsuit would be timely if the written request had been made within three years of consummation.
Rosenfield v. HSBC Bank, USA, 681 F.3d 1172 (10th Cir. 2012) – The Tenth Circuit, on the other hand, held in Rosenfield that a borrower’s written rescission notice to the creditor within three years of consummation is not sufficient to exercise or preserve the right of rescission. The court, relying on the Supreme Court’s decision in Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998), concluded that section 1635(f) of TILA requires borrowers to send written notice of rescission and file a lawsuit within three years of consummation. Because the borrower filed her lawsuit more than three years after consummation, the court affirmed the dismissal of the case.
What Should You Do? – Make sure you provide a proper notice of the right to cancel and proper material disclosures at consummation and then the rescission issue ends after three business days. If there is a problem with the notice to cancel or the material disclosures and the borrower asserts the extended right to rescind, then you should consult legal counsel to discuss options and determine the proper course of action.
Unless this matter is resolved by the Supreme Court, the proper course of action depends to some extent on whether your institution is located in the Fourth Circuit, the Tenth Circuit, or in another Circuit.